With pension funds increasingly taking a liability-driven investing (LDI) approach and hedging risk with the use of complex investment strategies, including derivatives, custodians are adapting to their changing needs, says Benjie Fraser, global pensions executive at J.P. Morgan Investor Services.
The use of derivatives is growing, not diminishing, Fraser says, as pensions increasingly focus on their liabilities. Pensions now consider themselves risk mangers, he adds. Custodians have responded by beefing up their services around processing and valuing derivatives as well as collateral management.
In addition, the advent of new regulations such as the Alternative Investment Fund Managers Directive (AIFMD), European Market Infrastructure Regulation (EMIR), Dodd-Frank and Financial Transaction Tax (FTT) mean pensions are looking to their service providers, particularly custodians, for help in interpreting the regulatory rulebook, Fraser says.
They also need tools to govern themselves as efficiently as possible, Fraser says, and tools to interrogate the information they have. Custodians can fill that gap for their pension clients, Fraser says.
Christopher Gohlke